Delayed Monetary Policy Effects in a Multi-Regime Cointegrated VAR(MRCIVAR)

Abstract

The effectiveness of monetary policies under delayed policy impacts are explored. Initially, in the context of a differential delay system, the macro-finance link is investigated. The nonlinear macro system with delays gives rise to a time-delayed optimal control problem. The optimality conditions are then analyzed, and the control problem is numerically solved by discretization and optimization methods. These solutions suggest that with too much delay, destabilizing financial conditions may emerge, rendering the policy ineffective. Then the possibility of asymmetric adjustments to a long-run steady-state, in a non-stationary environment is explored using a multi-regime cointegrated VAR (MRCIVAR) model for both an interest rate cut, and a non-interest rate cut regime. Though the rate cuts may not perform well with too long of a delay, given diverse shocks, monetary policy still performs better in a rate cut regime. Given the perils of deteriorating financial conditions, the better stabilization properties in a rate cut regime are empirically validated through data for European countries and the US.